Economy

This market cycle has been unique for a variety of reasons and constantly caught investors on the wrong-footed. Another unique aspect of the current market is the strong performance of private real estate while public real estate has languished. 

For Advisor Perspectives, Carlin Calcaterra and Brendan McCurdy of Ares Wealth Management Solutions investigate whether this is presenting an opportunity to buy the dip in public real estate or if this is a harbinger of weakness for private real estate. 

They use historical data as a guide and acknowledge that public real estate has delivered higher returns over the long-term. But, this is primarily due to higher amounts of leverage with public real estate. Adjusting for this factor, they believe that private real estate is the better investment from a risk/reward perspective.

They also believe that the data indicates low levels of correlation between public and private real estate. Therefore, these instances of divergence are not unusual and not necessarily predictive. 

In fact, 2 ⁄ 3 of the time that public real estate had more than a double-digit drawdown, there was no subsequent drawdown in private real estate. When there was a drawdown in private real estate, it often came at a nine to twelve month lag. This is notable given that the drawdown in public real estate began more than 18 months ago, and the asset class has been recovering in recent months. 


Finsum: A major market mystery is the significant weakness in public real estate while private real estate has continued to generate positive returns. Will this outperformance continue or is public real estate a leading indicator for private real estate?

 

In the Wall Street Journal, Konrad Putzier and Will Parker cover why the next few years for multifamily real estate are likely to be challenging following a strong bull market over the past decade. However, the trends that underpinned this bull market are slowing or reverting in some cases.

These include rising rents, a wide gap between supply and demand, and high rates which is complicating efforts to refinance. Of course these challenges are compounded by the fact that many owners and operators of apartment buildings took on too much debt with the belief that rising rents and property values would overcome any issues of leverage.

However, they didn’t account for the highest rates in decades especially as rates don’t seem likely to come down anytime soon given continued resilience for the economy and labor market. YTD, apartment building values are down 14%, undoing much of last year’s 25% gain. 

Already, some apartment owners have defaulted, and many fear that more defaults are imminent. While high rates are the precipitating factor, the woes have also highlighted that many owners had too much leverage. Many borrowed up to 80% of the property’s value using short-term, floating-rate debt. Additionally, credit markets might be tougher to access given the ongoing struggles of regional banks. 


Finsum: Typically, apartment buildings are seen as one of the safest parts of the real estate market. This is not currently true given that many owners have too much leverage and are seeing rents moderate while costs continue to climb.

 

REITs are attracting attention from investors for a variety of reasons. For one, it’s looking increasingly likely that the US will avoid a recession which bodes well for occupancy rates, property values, and home prices. Second, the Fed is in the final stages of its rate hike cycle which means interest rates will go from a strong headwind to a mild tailwind especially if inflation continues to move lower. 

Due to weakness over the past year and a half, REITs are quite compelling from a value perspective while also offering juicy yields to investors. For Benzinga, Kevin Vandenboss identifies 2 REITs that investors should consider buying.

He likes SL Green Realty which is an owner and operator of premium Manhattan commercial real estate property. While many areas of commercial real estate like offices and retail may never recover, SL Green is a bet that premium properties will recover - a historically savvy bet. Currently, the stock yields 8.8% and has a stable payout ratio of 59%, indicating a stable dividend.

Another is Medical Properties Trust which focuses on hospital facilities and has properties in 10 different countries, leading to a diversified portfolio. Also, medical facilities tend to be much more stable than residential or commercial real estate especially given an aging population in most parts of the world. Finally, it also has a dividend yield of 11% and a track record of annual dividend increases. 


Finsum: While REITs have been an underperformer for much of the past couple of years, the sector offers juicy yields and tantalizing upside given recent macro developments.

 

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